Insightandperspectivesondevelopmentsinmergers+acquisitions

Artificial intelligence M&A: the new gold rush

While many people are still in shock after discovering that there is actually no human controlling the steering wheel in autonomous cars, tech companies, including Google, IBM, Yahoo, Intel and Apple, have found themselves in the middle of a gold rush for artificial intelligence (AI) companies. According to recent research by CB Insights, around 140 AI companies have been acquired since 2011, and the number of AI startup M&As has increased more than seven fold between 2011 and 2016. In fact, the race to invest in AI has been characterized as “the latest Silicon Valley arms race.”

AI is a broad term that covers several technical methods and is based on the assumption that a machine can be built to “stimulate” human intelligence. In a nutshell, it predicts the likely future by reviewing the past through advanced statistical analysis. As pointed out by Ajay Agrawal, a professor at the Rotman School of Management, even though some current applications are quite stunning, AI is still in its infancy, and none of them are transformational. However, the tech sector’s interests in acquiring the young startups are already at fever pitch. It has been noticed that the majority of the startups were scooped up by the tech giants within 4 years of their first financing.

What prompts the current gold rush for AI while we are still in the midst of the uncertainties about when it will come to fruition? A Deloitte article suggests that companies are betting on how the future will unfold. They have been using AI not only for product innovation, but also for innovations in business structure, operations, process and business models. AI is seen as a way to redesign and transform the architecture of the company and to reinvent the company to enhance its market position in the future. Companies are scared about missing out the opportunities to get prepared for potential revolutions lying ahead, especially in light of the experiences of the once-mighty companies which fell apart by adopting a “wait-and-see” strategy to new technologies.

Another argument is that the AI hunters are not after a mature product, but rather the technical talent within the AI startups, as high-quality AI engineers are in significant scarcity. It has been observed that most or all AI companies are acquired for their teams and capabilities. As Victor Basta, the managing partner at Magister Advisors, noted, “AI may be the only sector in tech where pure team value now significantly exceeds the business value.”

Although no one knows when the AI revolution will take hold, the AI gold rush is becoming more and more intense. In its recently released report, Forrester contemplates that across all business sectors, “there will be a greater than 300% increase in investment in artificial intelligence in 2017 compared with 2016.” While ambiguities and speculations still cluster around the power and influence of AI, there is no doubt that one decision has to be made by many companies: will you join the gold rush?

The author would like to thank Jaray Zhao, Articling Student, for her assistance in preparing this legal update.

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